TVA's 10-year strategy on debt working


Posted 10/13/17

TVA's 10-year plan to reduce debt and rates is proving to be successful.That is according to TVA Executive Vice President and Chief Financial Officer John M. Thomas III.Thomas expounded on the …

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TVA's 10-year strategy on debt working


TVA's 10-year plan to reduce debt and rates is proving to be successful.

That is according to TVA Executive Vice President and Chief Financial Officer John M. Thomas III.

Thomas expounded on the details of the plan, its achievements and hoped-for results during a recent interview with the Cleveland Daily Banner.

The agency is currently at the mid-point of the plan and is preparing to enter a new fiscal year.

"We put together this financial plan that really had two key pieces to it," Thomas said. "One was we needed to improve TVA's financial health."

He said the combined debt of the agency was $27 billion and is currently operating under a $30 billion statuatory limit.

"The $27 billion was just too large of a debt burden for this size of a business," Thomas said.

He said the other part of the plan was discovering what the agency could do to improve the overall rate structure to make it cost-competitive.

"We spent the first five years on the rate and cost-competitive side," he said.

Thomas said TVA has spent $16 billion in capital "creating a more diverse fleet" which allows the agency to take advantage of lower cost fuel.

"We also improved the operational effectiveness of the plants we have," he added. "In particular, that included our nuclear plants and our larger lower-cost coal plants. We spent a fair amount of capital improving their performance."

"Over the last five years, we have reduced our fuel expense by $1 billion because of the improvements we have made and a little help from commodity prices," Thomas said. "That was one of the big priorities."

He said the other focus was on operations and maintenance expenditures, which is the second largest item in formulating rates.

"We had originally had a goal of reducing $500 million out of our operating costs and we actually exceeded that," Thomas said. "We reduced operating expenses by $800 million."

"Overall when you look at fuel, as well as operation and maintenance, we have taken $1.8 billion out of our costs," he said.

Thomas said TVA recognizes the operational performance of the plants.

"We are spending a little bit more today to ensure the reliability of our assets continue going forward," he said. "Reliability is a big part of what people expect of TVA."

"We really feel good about the reliability we have seen, the lower costs and the actual effective rate we charge our customers is 2 percent lower today than it was when we started this plan," Thomas said.

He said for the last several years, TVA has been increasing the base component of its rate slightly to pay for the capital program.

"But, the fuel cost of the rate updates itself on a monthly basis and it's hard to keep perspective on the impact of that $1 billion reduction in the fuel rate compared to the base rate," Thomas said. "The savings in fuel has more than offset the impact of the base rate. That's where you end up with the total effective rate customers are paying is 2 percent lower, even though you may see reports of the Board of Directors approving a base rate increase."

He said TVA is "very pleased" this process has improved the overall cost to its customers.

Thomas said there have been two surprises come from the first five years of the plan.

"We didn't really expect to see this level of fuel savings, so we actually thought our rates would go up slightly, but still be competitive," he said. "We were also surprised to see the impact of efficiency efforts that are happening in people's homes every day. That has caused TVA to lose a significant amount of projected load in revenue."

He said the revenue projections are $2 billion less over the 10-year impact because of efficiencies.

"As we think about the next five years, that is where we transition really from where we have seen significant cost reductions to where we will see significant debt reduction in the next five years," Thomas said.

"The one thing we are being more mindful of is the impact on these efficiency efforts that have already taken away $2 billion in revenue - are those going to escalate or not," he said. "Inside TVA we have created a distributed energy resources organization to specifically study and outline and look toward those strategies. That's an adjustment we had to make."

Thomas addressed the criticism from some that the agency may be moving too quickly.

"TVA, at the end of this, our original goal was to have $22 billion worth of debt down from $27 billion," he said. "The principal we have to pay on that debt and the interest is roughly $2.8 billion."

He explained the three major items which makes up customers' costs are $3 billion for fuel costs, $3 billion for operation costs and $3 billion for interest on the debt.

"We want to reduce the debt so the in-use customer won't have to pay this large principal and interest on an ongoing basis," Thomas said. "This is all about using rates for the end-use customer."


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